8 Common Investing Mistakes to Avoid

 Investing is not always easy, and profits cannot be guaranteed. Many resources exist for investing, and every individual has unique strategies that they find effective. Even after years of experience, professional investors don’t always get it right. Furthermore, each investor is unique, having different knowledge, risk tolerance, and investment goals. 

However, there are some common mistakes that many investors should avoid, as discussed in the below article.

Key Takeaways:

• The most frequent investing mistakes result from failing to recognize and implement best practices.
  
• You’ll feel more confident about how you’re accomplishing your objective when you start out with a clear investment plan that takes risk, research, balance, and reasoned decisions into consideration.
  
• Investing involves making mistakes, but all it takes to succeed in the long run is recognizing them and growing from them.
  

Common Investment Mistakes to Avoid

1. Not Understanding the Investment

One of the richest investors in the world, Warren Buffett, advises against investing in companies whose business models you are unfamiliar with. The best way to avoid this is to invest in a diverse portfolio of exchange-traded funds (ETFs) or mutual funds. Make sure you have a thorough understanding of each company that an individual stock represents before investing.

2. Lack of Patience

A gradual approach to growing your portfolio will lead to better results over time. Expecting a portfolio to do something other than what it is designed to do can lead to disappointment. It’s important to have realistic expectations about how long it will take to see growth and returns.

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3. Failing to Diversify

Professional investors may be able to generate alpha (or excess return over a benchmark) by investing in a few specialized positions, but average investors should avoid doing so.

It makes more sense to adhere to the diversification principle. A mutual fund or exchange-traded fund (ETF) portfolio should be diversified to include exposure to all major markets. Incorporate all of the major sectors when creating a personal stock portfolio. In general, don’t commit more than 5% to 10% of your portfolio to any particular investment.

4. Too Much Investment Turnover

Another factor that reduces return is turnover or shifting roles frequently. The transaction costs alone, not to mention the short-term tax rates and the opportunity cost of losing out on the long-term gains of otherwise investments, can eat you alive unless you’re an institutional investor with the benefit of low commission rates.

5. Trying to Time the Market

In an ideal world, investors would constantly maximize returns and minimize regrets by buying low and selling high. You may have been right in your belief that you can time the market better than the typical investor. But think about the risks that lie ahead.

In a well-known study titled “Determinants of Portfolio Performance” (Financial Analysts Journal, 1986), Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower examined the returns on American pension funds.

The study showed that, on average, almost 94% of the variance in returns over time could be explained by the choice of investment policy. In simple terms, this means that the majority of the return on a portfolio of investments is determined by the decisions you make about asset allocation, rather than timing or even security selection.

6. Risks Tolerance that doesn’t suit their goals

What does “risk” mean to you in terms of money?

It could bring up visuals of asset bubbles, supply chain bottlenecks, bankruptcies, and geopolitical conflicts along with the subsequent selloffs in the markets. However, do you also consider risks like running out of money, seeing your purchasing power decline due to inflation, or not having enough cash on hand to deal with an emergency?

There are trade-offs involved in every asset allocation choice. For instance, while cash could fulfill our desire to protect ourselves from losses during market downturns, it has produced almost no inflation-adjusted return over the previous 30 years.

On the other hand, over longer, multi-year time horizons, stocks have historically been the reliable engine of meaningful capital appreciation. However, due to their volatility, stocks are a risky place for saving money that you may need to spend in the coming months.

For this reason, we advise clients to participate in a thorough planning process. You can decide better about the risk tradeoffs you are willing to accept in order to reach your financial goals by dividing your wealth into sleeves with distinct purposes, from daily spending to leaving a long-term legacy.

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7. Taking Emotional Decisions

Emotion is possibly the biggest barrier to investment return. It’s true that fear and greed control the market. Neither greed nor fear should be allowed to influence an investor’s choice. Rather, they should focus on the wider picture.

In the short term, stock market returns may vary significantly, but in the long run, investors who are patient have witnessed higher returns.

When faced with a negative return, an investor ruled by emotion might panic and sell, but returns in the long run, they would have likely been better off holding onto the investment. As a matter of fact, patient investors might profit from other investors’ irrational decisions.

8. Trying to do it all themselves

Tax minimization is one strategy that can have a lot of benefits and let investors keep more of their profits. Selling assets that are trading at a loss is a common strategy used by investors to offset capital gains in other areas of their portfolio, known as “tax-loss harvesting.”

In earlier times, this strategy worked best when investors had the discipline, time, and motivation to monitor each position in their accounts daily. The goal of doing this was to find every possible way to harvest tax losses. With today’s robust technology, accounts can be monitored daily, improving your portfolio’s tax efficiency and more accurately capturing losses.

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How to Avoid These Investing Mistakes

Here are a few more tips to stay away from these common mistakes while keeping a structured portfolio.

Create a Course of Action

Determine your goals, where you are in the investment life cycle, and how much money you need to invest to reach them proactively. If you don’t think you’re qualified to handle this, look for a trustworthy financial advisor.

Also, keep in mind the purpose behind your investment decisions, which can motivate you to save more and help you choose the right allocation for your portfolio. Be mindful of past performance when setting expectations. Don’t expect your portfolio to make you wealthy overnight—true wealth is built over time through a steady, long-term investment management and strategy.

Set Your Plan to Run Automatically

You might want to add more as your income increases. Keep an eye on your financial investments. Evaluate the performance of your investments every year at the end. Based on your current situation, decide if your equity-to-fixed-income ratio should increase or decrease.

Set Aside Some “Fun” Money

Since it’s human nature to feel tempted to spend money, accept this fact, and instead of fighting it, set aside some money for “fun” investments. This money should not exceed 5% of your investment portfolio, and it should be money that you can afford to lose.

Never use your retirement funds and consider these options:

• Don’t sell calls on stocks you don’t own, for example, to limit your losses to your principal.
  
• Be prepared to lose all of your investment.
  
• Select and adhere to a predetermined limit to determine when you will walk away.
  

Talk to a Registered Investment Adviser

To avoid common investment pitfalls, it is highly recommended that you consult with a Registered Investment Adviser. They can offer a customized investment plan that meets your financial goals and takes into consideration your risk tolerance because they have the necessary knowledge and experience. This will help you make well-informed decisions that may maximize returns while limiting potential losses.

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Key reasons to consult a Registered Investment Adviser:

Expert Guidance: They can assess your financial freedom and status, pinpoint your investing objectives, and suggest appropriate investments based on your risk tolerance and market trends.

Expertise in diversification: They can assist you in building a diversified portfolio that includes a range of asset classes to reduce risk and possibly stabilize returns. 

Market Understanding: Equipped with comprehensive market data and analysis at their disposal, they can identify potential opportunities and make sense of complex investment decisions.

Emotional Management: Advisors can help you stick to a long-term investing plan by helping you resist the need to make impulsive decisions based on fear, greed or market volatility.

Fee Transparency: In order for you to know how much their services will cost, Registered Investment Advisers are required to disclose their fees.

The Bottom Line

Making mistakes is a natural part of investing. Being successful as an investor will depend on your understanding of what they are, when to commit them, and how to avoid them. Create a thoughtful, systematic plan and follow it to stay clear of the above mistakes. Put aside some fun money that you are willing to lose if you must take a chance. If you follow these recommendations, you will likely have no trouble building a portfolio that will yield numerous satisfying returns in the future.

Frequently Asked Questions